Category: Low Income Finance
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Since 2007 there has been a 20 % increase in the number renter households while the number of owner – occupied households has barely increased. Why? Right after the Great Recession home lending took a nosedive as foreclosure homes were worked off the inventory and lending standards were tightened. Builders focused on construction of multi-unit buildings where the market was more lucrative. Banks stepped back from mortgage lending, now the federal government backs about 70 % of all home loans.

So, prospective home buyers saw few opportunities for them to buy homes, while wages for the 80 % in income were stagnant they had no choice but to rent. When the economy started to recover builders focused on high margin, luxury homes that were priced why out of the budget for first time buyers.

As cities focused on bringing more jobs into their business center building homes or apartments were a secondary priority because businesses provided more tax revenue. By 2011, there was a 37 % increase in the number of households paying more than 50 % of their income in rent. There were almost 11 million households paying more than 50 % of their income in rent, that is a staggering number of people who are financially squeezed.

Source: Joint Center for Housing Studies, Harvard University – 2016

While the economy was taking off inflation increased much faster than the price of homes. Wages were not keeping up with the rate of home price increases which averaged about 6.7 % per year. The divergence between wages and home prices only continues to widen to the highest level since 2007.

Source: The Federal Reserve Bank of St. Louis – 2016

Between 2000 and 2018 the rate of inflation was 2.12 % versus 3.09 % so the greed factor for landlords was about 45 %. Why are rents moving up higher than the rate of inflation? Lack of affordable alternatives is one reason. In places like the San Francisco Bay Area and many metro areas, there is a huge jobs versus housing imbalance. In cities like Palo Alto there is a 20 to 1 jobs to household imbalance. With little competition in under housed growing metro areas landlords can charge any price they want. There just is not enough competition to keep an apartment building owner from raising rents.

Lack of homes means renters don’t have an alternate. Landlords have control because there are no other cheaper units nearby and the buying a home alternative is not an alternative for most working class folks with the home affordability index at its worst level in 8 years.

This lack of competition economists don’t seem to understand when rent price controls are proposed. When there is little competition apartment owners can just keep raising rents because there is nothing stopping them from gouging the renter.

Next Steps:

Most rent initiatives usually require a cap on rents as a way to deal with the problem. The problem with this approach is it penalizes the efficient property managers with the inefficient and greedy ones. We suggest a more innovative approach to tax the behavior we don’t want and give incentives for the behavior we do want. So if a landlord raises the rent above the normal cost of housing index by more than 1 % for a county then property taxes on the amount over would increase by 2x. This takes away the benefit raising the rent too high, the money won’t go to the landlord it goes to the city. If the apartment owner keeps the rent below the cost of living index by 2 %, they would receive a lower property tax by 4 % for that year, the money goes right to his pocket for running an efficient multi-unit business. In terms of building new units, these models can be used to come up with reasonable profits to attract investors while placing the focus on high quality property management.

Purchasing a home is crucial to providing competition to landlords. We have proposed in the past that the federal government provide incentives for builders to build less expensive homes with smaller square footage for the working class. Cities need to set aside land for homes, not businesses and quit being so greedy about the tax revenue they would get from a potential business taking the land. We need our leaders to make it a national priority for all families that want to own a home to be able to purchase a home on working class wages. When people own homes, they improve the home and the yard, the neighborhoods look better and values go up. People care more about their neighborhoods, schools and local services than when they rent an are likely to move somewhere else if the rent goes up.

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

Image: blog.medicareright.org

The GOP Administration has announced a new drug price reduction program that will use a basket of prices that 16 nations pay for certain drugs in the Medicare Part B Plan (hospital and health services plans) to determine the price the federal government will pay. Biotech drugs which are extremely expensive, yet have high efficacy are to be targeted. The price reductions will be phased in over a 5 year period.

The difference between what the U.S. pays for many often prescribed medicines is huge as the following chart shows:

Sources: Bloomberg, The Washington Post – 10/26/18

How did U.S. prices get so much higher than other nations? Simply, the other countries negotiated tougher than we did. The pharma industry lobby in Washington spends tens of millions of dollars every year to persuade lawmakers and the White House to give drug makers complete pricing freedom. In effect, Americans are paying for the low prices other countries receive where the drugs are being sold with low margins or below margin. Pharma companies do not have a problem with this inequitable situation as long as they make money.

For example, in the U.S. Genentech, a division of Roche, prices a single dose macular degeneration drug Lucentis at $1000 while the same exact bio medicine – Avastin costs 10 times less. The firm says that the extra testing for the eye version requires a higher price. This premise disputed by scientists who worked in the Lucentis division and left in part due to the greed of management.

The administration is also planning on developing ways to give the private sector more leverage in negotiating prices with drug makers. Plus, HHS wants to create new policies that would reduce incentives for doctors to prescribe expensive drugs.

Next Steps:

We applaud the GOP Administration for taking on the drug companies and their money making over all else approach to drug pricing. The pharma companies most affected are stung by the plan and charged it with ‘socializing medicine’. We don’t see their gouging prices to Americans as fair and equitable, so controlling prices to reasonable margins is common sense not a value shift of the health industry.

A good place to start cutting costs is to end prescription drug TV advertising like over 100 countries worldwide ban – that would allow the firms to cut billions off prices each year. Next, they need to end stock buybacks which take shares off the market to increase share price.

Sources: Leerink Group, Market Watch – 10/30/18

These are the top 6 of all pharma firms wasting money on goosing their stock price with stock buybacks to increase stock compensation to executives while patients get hit with soaring drug prices. Nearly $100 billion dollars spent in the last year would go a long way to bringing down the price of drugs. When the industry cries it does not have funding for research it needs to start here and drug advertising if they tried harder to find the money they could. The executives just don’ want to take a pay cut and run their firm with reasonable margins, yet are fine with driving patients into bankruptcy or adding thousands of dollars of debt to patient accounts.

The GOP plan does not go far enough, all medicines purchased by Medicare and HHS should be negotiated. The negotiating authorization for HHS has been in numerous bills in Congress repeatedly defeated in by the drug lobby. Congress needs to pass the bill, and get moving with a fair drug pricing model, with complete transparency from insurers and pharmacies to patients. The federal government can learn from the assertive approaches many states are taking by looking a efficacy based pricing to bring prices within reason as well.

It is time the pharma industry took a hard look at its financial engineering and redesign a more equitable pricing and reasonable profit model for patients, hospitals and suppliers.

Worker pay continues to stagnant. Yet, companies are raising prices. The price increases are due to tariff based supplier cost increases and government tax credits juicing the economy. The Federal Reserve survey for July in the Philadelphia area showed that manufacturers plan on raising prices by 3 % versus 2 % last year.

Source: HIS Markit, Bloomberg – 8/28/18

How did companies get this pricing power? Corporations have received a $1 trillion tax cut, reduced regulations by the Trump administration, less oversight by the EPA, and less scrutiny on mergers. Companies are at the zenith of their power allowing them to raise prices, keep wages low – below inflation, while increasing profits and executive compensation.

Source Bureau of Labor Statistics, Bloomberg – 8/24/18

Worker economic power continues to wane, as real wages actually turned negative this past month. Worker share of income as a percentage of non-farm business income is at a 70-year low even in a strong economy.

How are consumers handling the budget shortfall? By borrowing, the debt as a percentage of income of the bottom 80 % is 4 times the debt of the top 20 %.

Most of this debt is in the form of credit card, auto loans and home equity lines of credit. Home owners have done a better job keeping their first mortgages in line with incomes this year versus the housing bubble of 2008.

Next Steps:

Caught between high prices and flat real wages, consumers are filling the budget gap by piling on debt. Companies are getting even richer from both sides of making a profit – increasing income by raising prices and reduced costs by keeping worker wages low.

Why is this vise tightening on worker budgets? Corporations are accumulating power every day at an ever increasing rate; buying other companies, issuing stock backs to hype stock price, increasing lobbying budgets to get the federal government to make rules that tip their way, consolidating supply channels, distributing manufacturing world-wide and automating every job they can conceive be done by a robot. Prices are rising due to tariffs in many industries, the wide spread use of tariffs on some consumer goods, contagion of one product category to another (tit for tat) and shrinking channels of distribution reducing price competition.

Meantime, workers continue to lose power at even faster rate than corporations gain power. Wages have been stagnant for 20 years for the bottom 80 % in income. We have outlined in previous posts why wages have actually declined – rise of corporate power, fewer unions, automation, mergers in the same industry reduce the overall number of jobs, increased availability of candidates over the Internet, outsourcing, and the gig economy. Workers are getting some relief in the gig economy with lawsuits to recognize Uber drivers as employees, but it is a tough long slog through the courts. Overall, most court decisions are favoring companies in reducing union power, allowing companies to give millions to campaigns unchecked (Citizens United case) and overtime pay.

Eventually prices will rise too high for declining incomes causing consumer spending to fall. Consumer spending has been falling this year, with the most recent decline announced today, as a revised downward revision to 3.8 % in 2nd quarter.

Sources: BEA, Factset – 6/1/18

Remember, corporate executives are compensated handsomely for what? Making more profit by increasing income and reducing costs. Workers, after all the PR from executives are viewed as a cost when managers get into salary and compensation review meetings. Workers are being squeezed between low wages and increasing prices nationally to feed the ever increasing profit making systems of corporations. Until,we as a society start to see that workers need to be an equal partner in corporate management, sharing in profits and benefits things will not change. Without workers receiving a fair share of the economic pie, the common good will suffer and will lead to civil unrest and a contracting economy when consumer spending evaporates. The economic reality is that the U.S. economy is not working for the bottom 80 % and until it does we are faced with major disruptions in our economic life.

Washington Attorney General, Bob Ferguson negotiated with seven major fast food franchises including; McDonalds, Arby’s, Carl’s Jr., and Jimmy Johns to delete franchise agreements with parent companies which include a no poach clause. The no poach clause provided a way for individual franchisee’s to keep managers from other same brand franchisees from hiring their workers. Two Princeton professors, Krueger and Ashenfelter published a study last year that estimated that no poach clauses affected about 70,000 individual restaurants in the U.S. or about 25 % of all fast food outlets. The professors noted that the clauses were primarily to keep turnover down, limit competition and job mobility with other same brand franchises. As a result workers had limited options to negotiate higher wages, work schedules or conditions.

Turnover in the fast food industry ranges from 60 – 70% in up-scale dining restaurants to over 120 % in fast food franchises. Franchisees are faced with constant pressure to raise wages in a low wage industry but face tight profit margins of 3 %:

Source: The Heritage Foundation – 9/4/14

With only 3 % margin to work with it is difficult for a franchise owner to raise wages. Workers also mention in surveys the need to have more scheduled hours with more notice on the hours they work. With the no poach clauses gone from contracts workers can move to a same brand restaurant and negotiate for better hours and schedules.

We are pleased to see Attorney General Ferguson successfully negotiate with major fast food chains to delete the no poach clause to give workers more negotiating power and flexibility in their job situations. It seems to us that major chains should have figured out that at least keeping the worker in the same chain was a plus, and the deleting the clause may force owners to treat workers better in order to reduce turnover. Better managed franchises would rise to the top and have lower turnover rates. Now on to raising low wages, increasing wages to a livable level is a complex issue that will require all involved; the owners, corporate franchise executives and workers to come up with a plan that will give workers the wages they deserve.

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab.)

Photo: marketplace.org

Household formations have been trending down over the past 30 years from its peak reached after a continual increase since 1955. More than a quarter of possible home buyers are unemployed, underemployed, saddled with student debt or living at home with their parents making home buying a challenge. The other possible household formation group is making such low income they are forced into renting as the only budgetary alternative.

So, while wages for the 80% in income, non – supervisory workers have been stagnant; profits, stock buybacks, executive salaries and other financial gimmicks have provided the top 10 % with 90 % of national income since 2008. In effect, we have become a nation of renters due to two factors: wages being held down, and inflated assets benefiting the rich.

Source: Real Investment Advice – 7/13/18

Corporate executives do not make their stock price and profit targets by raising wages resulting in reduced profits. Wages as a cost cut immediately into profits, which a CEO wants to stay clear of having to explain to the Board or shareholders. Does it really make sense that workers are not getting wage increases in a job market with the lowest unemployment rate in 10 years? Until workers get enough countervailing power in wage negotiations worker wages are likely to stay stagnant. No, executives are allocating profits, offshore and tax cut funds to benefit themselves and shareholders while workers are left out of the economic feast.

Next steps:

We have outlined multiple reasons for lack of wage increases in earlier posts, the bottom line is executives don’t want to give raises beyond inflation. Proposals like Senator Cory Booker’s Worker’s Dividend Act to share stock buyback dollars with workers is a good start, yet the sustainable solution lies in corporate governance, where activities shareholders required management to give workers their fair share of profits; for example if executives receive a 5 % cut of the profits workers should receive the same 5 % as well.

To give first time home buyers a boost, we need to reduce student loan debt by re financing their rates to the rates that the Federal Reserve offers bank. After all we are ‘banking in the future’ of our young people. Where possible student debt could be forgiven for domestic service corps work or working with corporations who hire graduates to reduce their loans as part of the offer package. Government mortgage agencies need to support first time buyers with reduced down payment requirements and other incentives. To incentivize home builders set asides of homes for first time buyers need to be established to create inventory from which a first time buyer can select their home.

Increasing household formations should be a top priority for policy makers and the wealthy alike. When household formations are moving ahead, furniture, appliances, home improvement hardware, and thousands of product and services are purchased. Plus, when people own a home they have a piece in the future of their neighborhood, schools and community which will increase property values for all.

The grand plan by financial services companies thirty years ago was to have Baby Boomers invest in 401k matching plans offered by their employer to build a secure retirement nest egg. The 401k plan funds would be invested in the stock market. Companies would eliminate their defined benefit pension plans thereby reducing their retiree costs and transfer the savings responsibility onto the worker. The reality is that worker saving just never happened. Since 1970, 90 % of pensions have been replaced by 401k or IRA plans. Unfortunately, many Americans raided these plans to pay for living expenses during the Great Recession

Consumer debt has soared for auto and student loans, further squeezing their ability to save. The combination of being left on their own to manage their retirement savings, limited matching from corporations not matching pension income streams and debt means that households are not saving enough to maintain their standard of living.

The situation defaults to retirees relying on government sources completely for retirement income, working longer than they had planned or gaining assistance from children. While, funding help from children may work for temporary bridge loans, ongoing assistance will hurt their children’s ability to save as well, causing a snowballing effect on future saving.

“Our politicians have designed a failure prone retirement system allowing corporations off the hook providing full defined benefit pension programs with professional management. Instead, 401k employee and employer match defined contribution programs were created where the individual is responsible for investing retirement funds safely. The present retirement program is a patchwork of 401ks, IRAs, Roth IRAs and SEP programs for small business. “

We continue to see many retirees at or below the poverty level:

“Today, Social Security only provides a $12,000 a year benefit to the average retiree. Yet, Social Security provides 80 % of the benefits that 40 % all retired people depend on. A Retirement Savings Account would have as a core principle that the combination of Social Security and worker’s savings provide at least a guaranteed income at the poverty level at age 65.”

“Funds deposited by workers into their Retirement Savings Account would be tax deferred up to $40,000 per year until age 65 similar to a traditional 401k today. Most workers will see a lower tax rate at retirement as this provision allows for lowering the cost of saving for retirement during high salary tax years. Corporations contributing to a workers’ Retirement Savings Account would be allowed up to a 50 % corporate tax deduction on the matching dollar amount to incent companies to contribute.

There would be no cap on total funds added to the Retirement Account by a worker. Workers would be allowed to obtain a medical or education loan with their retirement account as collateral but only up to 10 % of the value, which if defaulted and not paid back, would be paid back on a pro-rated basis by a Social Security deduction beginning at age 65.

The crisis for our retirees continues to worsen as Congress does nothing to look at the root causes of the income challenge. We need to develop innovative solutions to make the golden years for our senior citizens secure now.

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab.)

Photo: USA Today

The US Forest Services has kicked off a new program to reclaim urban lumber from abandoned homes by using workers from non-profits who had criminal records. The innovative program attacks two major problems in urban centers like Baltimore, where 70 % of criminal offenders are returned to prison within 3 years, and there are over 16,000 abandoned structures in the city. Quite often the abandoned structures are hives of prostitution, drugs and criminal activity.

Morgan Grove, Urban Wood Project leader, says “It’s about air quality and water quality. It’s also about reducing crime and helping people move forward”. She continued by declaring, “At its core, it’s really still maintaining the mission of revitalizing that the Forest Service has had since the agency was started in the early 1900s.”

The following table outlines the linked issues of high crime, abandoned buildings, high prison rates and the health of communities:

It is interesting to note the issues Baltimore city officials face in reclaiming their communities to return them to being healthy places to live, environmentally, and to redeem the people in the community to a productive life. We see many of these same issues in the rural regions of our country, that have been left behind by losing jobs to other offshore sites, reduced education opportunities, poor health, drugs and slow Internet infrastructure.

As a country we are missing the opportunity to rebuild lives, the environment and the economy unless we support innovative programs like the Urban Wood Project.

While consumers did pay down their credit card debt by $40 billion during the first quarter of 2018, they still owe a giant $1.021 trillion in revolving debt. Credit card debt is at the second highest level since 2008, during the Great Recession. Consumers piled on another $91.6 billion by the end of 2017, at a run rate of 104 % of the average over the past 10 years.

Sources: Marketwatch, WalletHub – 6/13/18

Adding to consumer woes are interest rates that are rising, adding to the servicing costs of credit card, auto loan, and student loan debts. Below the chart shows debt servicing costs as a percentage of disposable income, while mortgage debt servicing is declining consumer servicing costs are rising.

Finally, non-supervisory worker’s wages are stuck at 2.5% and when inflation is taken into account are largely flat. As consumers continue to try and maintain their standard of living, they are taking on more revolving debt which is costing more for them to pay. This financial squeeze is sustainable as long as jobs are abundant as they seem to be now, but if the economy turns down and layoffs happen it will be hard times for workers. A survey published today in the Wall Street Journal blog – The Daily Shot showed executives plan layoffs as the first approach to deal with tightened financial conditions and slow sales.

Next Steps:

Workers need to receive a living wage that is not stagnant as wages have been for the past 10 years since the recession. Over 14 % of all workers have not received a raise in the last year versus 11% prior to the recession. Stock buy backs need to end and those funds invested in raising worker wages, increasing productivity and providing job training and development. Corporations stash over 40 % of their profits in overseas tax sheltered accounts – all those funds need to come back to the US with companies paying their fair share of taxes. Corporations are the beneficiaries of job training and education, and should pick up more responsibility in terms of taxes for apprenticeship programs on par with those in Germany to provide US workers with the advanced skills needed to obtain a good paying job and create a dual track besides college. Today, there are more job openings than candidates available to fill those jobs, we need to invest developing worker’s job skills to close the gap.

As we predicted one result of import taxes (blog of January 24) the Administration placed on imported washers was that domestic suppliers would raise prices. Sure enough they have raised prices by 7 – 15 % at a time when consumers are squeezed. As tariffs were placed on imports we forecasted that domestic manufacturers would take advantage of the higher competition prices and raise their prices as Maytag and Whirlpool have done. Their spokesman say they had to raise prices due to increasing costs of steel and aluminum yet they have raised prices before the steel tariffs went into effect. Once again corporations lobbied government to change the rules in their favor to make more profits while consumers lose.

Other manufacturers for processed goods, food and items with a high shipping cost are raising prices as well.

Sources: Labor Department, The Wall Street Journal – 5/9/18

Of major concern is a combination of higher interest rates, tariffs and competition will cause increases in producer prices that companies will not be able to pass along to consumers. Consumers are too indebted to accept the price increases. Margins are squeezed, companies lose sales, and a recession begins. Possibly the wealthy can continue to purchase major appliances and processed items but the middle class will not.

Next Steps –

The middle class is caught in the cross fire of competing interests in our economy where the Federal Reserve did keep interest rates artificially low increasing the value of financial assets like stocks, homes and consumers were able take on too much debt. The real assistance would be for the federal government to invest in jobs training, career development, Heartland regional economies, African American and Hispanic community development, welcome immigrants, and end stock buybacks. Corporations could allocate the $1 trillion in cash they are holding in accounts mostly overseas and invest in their employees – raising their wages, productivity research, decent family leave programs and giving them more voice in corporate decision making.

The Federal Reserve just reported that consumer debt related to auto and student loans are at the highest level they have ever been since 1970 (2nd chart). As we have noted wages have stagnated since the Great Recession with 90 % of the income gains going to the top 10 % in income. The middle class has been left out of the mainstream of the economic recovery over the past 10 years.

While revolving debt from credit cards has fallen (top chart) since the recession, non revolving debt for autos and student loans has soared. Consumers are caught in a squeeze between debt and flat wages. The Commerce Department reported on 1st Quarter GDP noted that consumer spending had decelerated during the quarter. Sentiment surveys have also shown a reduction in buying plans due to trade issues and any benefit from the tax cuts being lost due to rising prices from tariffs. Banks have posted 7 straight months of an increasing percentage of charge offs on bad loans where consumers are not making payments on non-mortgage debt.

As interest rates go up, payments grow larger per month, with the added tightening of increased prices. The middle class is caught trying to maintain their standard of living by borrowing money to mitigate flat wages.

Next Steps –

There are two sides to the squeeze – increasing wages and reducing loan payment size and principal.

We have endorsed Sen. Cory Booker’s bill called the Worker Dividend Act to share billions of dollars in stock buyback dollars 50/50 with employees. We see a need for incentives for employers to share management extreme wealth now at 300 times average worker salary with the line staff. Or if they can’t do it with incentives we like the City of Portland’s plan to require corporations share their funding above the 150 times level with employees. In our blog about why Wages Are Stuck we outline a series of steps including: placing workers on Boards, ending outsourcing overseas, end H1-B low wage visas, allow repatriated funds be brought back to the US only for wages, productivity or training investments, end stock buybacks and raise employee wages with the funds, breakup anti-competitive oligarchies of huge corporations to create more competition and jobs, balance the recruiting and hiring process for candidates, and offer incentives for employee training and development.

On the loan side, we recommend that student loan rates be brought back to reasonably fair rates as a percentage of the Fed Funds rate, and offer a series of forgiveness programs for universal service, community teaching and caregiving. For auto loans, we request that the Consumer Finance Protection Bureau evaluate major bank auto loans to ensure they are fair and do not have hidden fees or unusual interest rate riders.